Ikhmas ‘not losing sleep’ over failure to win Pan Borneo job
KUCHING: Ikhmas Jaya Group Bhd (Ikhmas) is not losing sleep over the group’s failure to win any contract from the Pan Borneo Highway, SUKE and PR1MA.
According to AmInvestment Bank Bhd (AmInvestment Bank), for the Pan Borneo Highway, Ikhmas believes the winners generally have priced in too little buffers that leave them with no margin for error, particularly, the risk of much higher input costs at some points over the construction period of three to four years.
“The risk is real – given that the building materials market in East Malaysia is tightly controlled by a small pool of big local players.
“This translates to tremendous pricing power for them,” the research house said.
“Similarly, Ikhmas finds the winners’ bids for the SUKE work packages too aggressive, and it is cautious on the PR1MA housing projects as awarded PR1MA projects may be subject to extended delays due to budget allocation constraints.”
AmInvestment Bank highlighted that given the intense competition at the main contracting level for the Pan Borneo Highway, MRT2 and key expressway projects, Ikhmas now focuses on “opportunistic” subcontracting works for these projects.
The research firm noted that for the Pan Borneo Highway, there is a possibility that Ikhmas will take on sub- contracting work packages.
“Nonetheless, it will be selective with the main consideration being that the main contractors must have control over the supply and pricing of building materials ( preferably, themselves being among the few local producers of building materials),” it said.
Similarly, for MRT2 and key expressway projects (including SUKE of which Ikhmas failed to secure any main packages), Ikhmas is prepared to participate as a subcontractor by lev-
The risk is real – given that the building materials market in East Malaysia is tightly controlled by a small pool of big local players.
eraging on its forte in bored piling.
“In addition, it is all ready to double up as a ‘rescuer’ for the projects if the projects’ existing contractors fail to perform, or unable to do so due to the ‘doublebooking’ their resources.
“Ikhmas foresees plenty of these kinds of opportunities in the market over the immediate term, as the construction sector heats up with multiple large-scale projects getting off the ground at the same time,” the research firm said.
On earnings growth in financial year 2016 ( FY16), AmInvestment Bank noted that it cut its FY16-18F earnings forecasts for Ikhmas by 22 per cent, 20 per cent and 10 per cent respectively.
This was largely to reflect the delays in two key projects which included the flyover package for a road upgrading project outside of the Klang Valley and the basement package for a high-rise project in the Klang Valley.
“In both instances, Ikhmas will not be liable for liquidated and ascertained damages ( LAD) arising from late delivery as it was unable to start work in the absence of site possession,” the research firm said.
AmInvestment Bank has projected FY16 earnings of Ikhmas to only grow by 13.3 per cent (versus 45.9 per cent previously), and the research firm projected for this to accelerate to 29.6 per cent in FY17, driven by an outstanding orderbook of RM666 million.
It noted that year to date ( YTD), Ikhmas has secured new jobs worth RM438 million.
“It guided for best- case job wins of another RM500 million before the year is out, pinning its hopes on sizeable public works,” the research firm said.
The research firm is more inclined to be more prudent by keeping its replenishment target for Ikhmas at RM500 million annually in FY16-18F.
Despite the earnings downgrade, AmInvestment Bank maintained ‘buy’ and kept its fair value at RM0.92 per share as it rolled forward its valuation base year to FY17F (from FY16F).
The research firm valued Ikhmas at 13-fold forward earnings, at a slight premium to its oneyear forward target price earnings ( PE) of 10- fold to 12-fold for small- cap construction stocks, to reflect a relatively less competitive piling segment vis- à-vis general contracting.
AmInvestment Bank